The dismal state of economics at AEA meeting in Chicago
“The big cannon should be fiscal policy [more deficit spending].”
– Peter Diamond, Nobel Prize Economist and New Fed Member
Every year I attend (and sometimes speak) at the American Economic Association (AEA) meetings, where the top economists meet and present papers on current issues. In the past, I’ve confronted Fed chairman Ben Bernanke, government officials, and Nobel laureates with tough questions.
This year’s conference was held in Chicago, home of the famed free-market Chicago School of Economics. But since the financial crisis of 2008, the followers of the late Milton Friedman are seldom seen and heard from.
Peter Diamond’s solution to unemployment: Tax (the rich) and spend!
Panels are always the most provocative, and usually involved famous people. This year the panels were dominated by Keynesian Nobel Prize winners such as Paul Krugman and Peter Diamond. Diamond was just appointed by President Obama to be a new Fed member.
A major topic at this year’s conference was the lousy employment numbers. The unemployment rate is 8.5%, and more importantly, job openings are falling. Apparently the unemployed are dropping out of the labor force and giving up.
In a popular session, “What Happened to the US Employment Miracle,” the panelists agreed that the employment miracle ended around 2000, even before the 2008 crisis. And 10.6 million jobs will be needed just to get back to 2007 levels. Chicago economist Steven Davis said that despite the clear benefits of a college education, men are not responding and going to college.
What to do? “The big cannon is now fiscal policy,” Diamond said. He recommended that Washington spend more and run even deeper deficits, preferably on education, R&D, and infrastructure, not foreign wars. And he meant “now is the time to act to get people back to work.”
More than today’s $1.7 trillion deficit? Aren’t we risking default like Europe? I asked. Apparently not. “There is no imminent debt problem in the United States as there is in Europe,” he responded.
Since he was headed to the Fed, I asked him what he would recommend Bernanke do to stimulate the economy. “Should we inflate our way out?”
“There is no inflation problem today,” he said. Meaning: Get the printing presses going 24/7!
I asked Diamond and other experts on why the employment market was so stagnant. Was it due to excessive regulation (ObamaCare, Sarbanes-Oxley, Dodd-Frank, minimum wage)? They said “no” to all these reasons. But higher taxes and unpredictable monetary policy could hamper the recovery in the jobs market.
Diamond recommended that now is time to reform Social Security, before all the baby boomers start getting benefits. I suspect that means higher taxes on the wealthy and raising the retirement age — not privatization — but he didn’t go into particulars.
Diamond is an advocate of a sharp increase in the marginal tax rate on wealthy individuals — to as high as 73%, according to the latest issue of the Journal of Economic Perspectives — and without any loopholes. He says the studies show this high rate won’t hurt incentives. Really?
Krugman sings the same tune
Paul Krugman, the famed New York Times columnist, echoed Diamond. He told me that the only option left open now is “more massive deficit spending.”
What about the fear that we are headed toward default European style?
“Not a chance,” he replied. “We’re years away.” He pointed out that Treasury bonds are still rising, so there’s no worry. (10 year bond yield is under 2%!)
I pointed to numerous examples of developed countries (Canada, Sweden, New Zealand) that had cut spending and reduced their deficits, and their economies flourished. “Not relevant!” he exclaimed. “None of these countries were suffering from a severe recession.”
Would he favor a cut in the corporate tax rate, as advocated even by Democrats? “No,” he said emphatically. In fact, he supports a tax increase on wealthy Americans, up to 50% without loopholes.
Sadly, these are the kind of economists who President Obama is listening to. Can we afford another four years of tax and spend? It’s scary.
Anti-Davos Conference in the Bahamas
To combat this fiscal insanity, I’m organizing the first Global Financial Summit in balmy Bahamas Feb. 1-4. The Global Summit is a free-market alternative to the establishment’s World Economic Forum held every January in Davos, Switzerland. Our experts include Steve Moore (WSJ), Peter Schiff, Richard Viguerie, Richard Rahn (Cato), and dozens of others. Come join us for this historical first. Details here or call Tami Holland, toll-free 1-866-266-5101.